Lender Financing: It’s a Balancing Act
"Projections can be a key piece of information for a company to present to a lender," Quirk says. "The lender wants to know the economic benefits in making the loan and how it will be repaid."
Decline in Valuations
One of the most notable differences from the pre-recession to today's landscape is the decreasing equipment value, points out Thomas Davies, vice president of People's Capital in Bridgeport, CT. He notes that most finance companies are no longer doing eight-year terms without money down.
"A printer's cash flow is still considered the primary benchmark when underwriting a new request," Davies stresses. "We wouldn't expect to see the company's revenues back to where they were in 2007 or 2008; however, we would like to see that the business adjusted its costs and is generating enough cash from its operations to support its obligations.
"Also, we look at the company's liquidity (cash, credit line availability) to see if it has the ability to support any short-term cash flow problems, and its leverage (debt to tangible net worth) to understand its ability to survive should the economy and industry continue to remain weak."
Quirk feels the two most prominent benchmarks lenders use are the Debt Service Coverage Ratio (DSCR) and Senior Debt/EBITDA, which paint an accurate picture of a printer's ability to take on added debt. DSCR should be greater than 1.0x, she says, with the new debt calculated into the ratio.
"Each financial institution will set its covenants based on a number of factors as they analyze the company," Quirk adds. "Naturally, the Senior Debt/EBITDA should not be very high."
How can printers best position themselves for success when approaching a lending institution? Again, Quirk underscores the importance of being able to convey the financial impact of the loan request, which holds true when trying to obtain monies to purchase equipment, increase a line of credit or secure a term loan.